BA J. Galván1 ACCOUNTING IN E- COMMERCE COMPANIES E-commerce companies characteristics and unique accounting methods

BA J. Galván2 Overview  Financial characteristics of E-Commerce companies  Accounting consequences  Unique accounting aspects

BA J. Galván3 Financial Characteristics of pure e-Commerce Companies Large expenditures on site development Large expenditures on customer acquisition or traffic acquisition Low levels of revenues Fast growth in revenues High levels of losses Initial stages of the business growth

BA J. Galván4 Comparison with traditional Companies Lower levels of fixed assets Higher levels of intangible assets:  Customers  Systems  Content  Employees Low marginal costs of a marginal customer Higher operating uncertainty Rapidly changing environment

BA J. Galván5 Financial Characteristics Large cumulative losses  Start-up costs Negative operating cash flows  Using liquid resources to finance operations Negative free cash flows  Operating cash flows are not sufficient to cover capital expenditures

BA J. Galván6 Financial Characteristics High growth rates in revenues  Working capital should grow at a high rate to keep pace with revenue growth Large fluctuations in operating results due to environmental changes At the initial stages, firms do not have good managerial controls:  Unnecessary expenses  Investments in projects that do not bear fruit and need to be abandoned

BA J. Galván7 Financial Characteristics Financing opportunities:  Can typically not borrow funds  Can issue equity, but dilutes the founders and prior investors  Can finance some operations through issuance of contingent claims Stock options to employees Warrants to suppliers (rent, referring sites, etc.) Convertible preferred stock and convertible bonds

BA J. Galván8 Financial Characteristics Large differences between firms that issued stock to the public and those that did not:  Cash reserves  Book value of equity  Can use cash in agreements instead of using equity or contingent equity  Can use cash to acquire new customers  Can use the cash to build physical operations

BA J. Galván9 Accounting Consequences Intangible assets cannot be recorded in many cases, and are immediately expensed. Intangible assets that are recorded have shorter useful lives than tangible assets  Depreciation of equipment versus amortization of software development costs Some contingent claims will not be recorded as an expense.

BA J. Galván10 Unique Accounting Aspects Disclosure of various revenue sources  Sale of products or services  Advertising  Leveraging customers Disclosure of various expenses  Product or service cost  Selling and marketing cost  System development cost  Content cost

BA J. Galván11 Unique Accounting Aspects Barter revenues  Can account for a significant proportion of all revenues  What is the economic cost of bartered advertising?  Can you rely on non-bartered revenues to determine revenues and costs of bartered advertising?

BA J. Galván12 Unique Accounting Aspects Stock options awarded to:  Employees Usually not recorded as an expense  Suppliers and service providers Shown as an expense, but not necessarily matched properly with revenues  Customers Should be shown as a selling expense, but sometimes shown separately

BA J. Galván13 Other Unique Accounting Aspects Gross or net revenues  Record commission revenues or total revenues Tickets for a performance. Price is $50, processing fee of $5, customer pays $55. Should you show revenue of $55 and cost of goods sold $50? Or revenues of $5? Why does it matter? Rebates for complementary service  36 months Internet connection Can you show it as revenue and selling expense?

BA J. Galván14 Other Unique Accounting Aspects Shipping and handling expenses included in revenues (and selling expenses).  Customer pays $10 for a book, plus $4 for shipping. Assume the book costs $8 and shipping is $5. How do you show it on the income statement? Free or introductory offer is recorded as revenue and selling expense.

BA J. Galván15 Other Unique Accounting Aspects How is self-developed software accounted for? Over what period is it amortized? When can an auction site recognize revenues?  Sometimes needs to list an item for a specified period. How should rewards be accounted for?  Current expenses or capitalized acquisition costs?

BA J. Galván16 GOOGLE’S FINANCE

BA J. Galván17 XMAS & ACCOUNTING